In so-called combination trading, or simply combo trading, a trader places on the market a single price for a combination of different instruments. These different instruments can be shares, options etc. or any combinations thereof. A combination order could for example be “Sell two lots of instrument A, and buy three lots of instrument B for a combination price of $100”.
A combination order is typically listed as a single item on the market. Thus, in order for a combination order to get be executed, all the involved instruments must be traded as a single order. This combination instrument could be a tailor made combination (TMC) or a standard combination. The strategy is the specific relation between the different instruments making up the combination. The number of different instruments, or so-called legs, could vary from two, as in the example above, up to four or even more.
When a combination order has been executed, the prices for the different kinds of instruments traded, the so-called leg prices, are typically determined. In the above given example, one leg price for the instrument A and another leg price for the instrument B are determined. One reason for this need to determine leg prices is because the different instruments could for example have been traded for different clients of the broker. Another reason could be that that the leg prices should be booked on different accounts.
If a combination order is met by a number of orders in individual instruments making up the combination, the leg prices may of course be determined from the actual paid prices for the different instruments.
However, if a combination order is met by another combination order the determination of leg prices is not straightforward. Typically, when determining the leg prices, the market is looked at, and estimated prices are generated and assigned to the different legs. A so-called seed price may be generated as the estimated price for each leg but the last one of the combination, whereas the price of the last leg may be generated from the paid price of the combination order and the seed prices as generated.
One way of finding the seed prices is to look at the current bid, ask and/or last paid prices on the market for the individual instruments and assign the leg prices accordingly in any desired order. In the situation where the market has just opened and there are no orders and there have been no trades on all the series, the seed prices will typically be theoretical or default values.